U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 1997
OR
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _______ to _______
Commission File Number 1-14556; 0-21857
POORE BROTHERS, INC.
---------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 86-0786101
-------- ----------
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
3500 S. La Cometa Drive, Goodyear, Arizona 85338
------------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
(602) 932-6200
--------------
(Issuer's Telephone Number, Including Area Code)
Check whether the Registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
` --- ---
As of September 30, 1997, the number of issued and outstanding shares of common
stock of the Registrant was 7,051,657.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
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Table of Contents
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 ....................................................3
Consolidated Statements of Operations for the three and nine
months ended September 30, 1997 and 1996 .............................4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 ....................................5
Notes to Financial Statements ........................................6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition ..............................................9
Part II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................13
Item 2. Changes in Securities and Use of Proceeds............................13
Item 3. Defaults Upon Senior Securities......................................13
Item 4. Submission of Matters to a Vote of Security Holders..................13
Item 5. Other Information....................................................13
Item 6. Exhibits and Reports on Form 8-K.....................................14
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1997 1996
---- ----
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................... $ 937,407 $ 3,603,850
Restricted certificate of deposit .................................. 1,250,000
Short term investments ............................................. 1,022,439
Accounts receivable, net of allowance of $176,000 in 1997
and $121,000 in 1996 ............................................. 1,819,492 1,912,064
Inventories ........................................................ 518,720 863,309
Other current assets ............................................... 247,786 193,581
------------ ------------
Total current assets ............................................. 4,545,844 7,822,804
Property and equipment, net ........................................... 6,592,150 4,032,343
Goodwill, net ......................................................... 2,202,350 2,295,617
Organizational costs, net ............................................. 136,040 174,614
Other assets .......................................................... 111,576 15,067
------------ ------------
Total assets ..................................................... $ 13,587,960 $ 14,340,445
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 611,960 $ 1,318,952
Accrued and other current liabilities .............................. 561,147 500,192
Current portion of long-term debt .................................. 1,349,706 1,818,058
------------ ------------
Total current liabilities ........................................ 2,522,813 3,637,202
Long-term debt, less current portion .................................. 4,946,020 3,355,651
Other liabilities ..................................................... 6,000
------------ ------------
Total liabilities ................................................ 7,468,833 6,998,853
Shareholders' equity:
Common stock, $.01 par value; 15,000,000 shares authorized,
shares issued and outstanding 7,051,657 (1997), 6,648,824 (1996) 70,516 66,488
Additional paid-in capital ......................................... 10,794,768 9,702,940
Accumulated deficit ................................................ (4,746,157) (2,427,836)
------------ ------------
Total shareholders' equity ....................................... 6,119,127 7,341,592
Total liabilities and shareholders' equity ....................... $ 13,587,960 $ 14,340,445
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues ..................................... $ 3,334,303 $ 5,019,964 $ 12,658,902 $ 13,549,778
Cost of sales ................................ 3,011,936 4,177,929 11,139,582 11,345,613
------------ ------------ ------------ ------------
Gross profit ............................ 322,367 842,035 1,519,320 2,204,165
Selling, general and administrative expenses . 1,009,093 908,031 3,020,292 2,299,731
Closing of Tennessee manufacturing operation . 470,021 470,021
Sale of Texas distribution business .......... 150,000
------------ ------------ ------------ ------------
Operating (loss) ........................ (1,156,747) (65,996) (2,120,993) (95,566)
------------ ------------ ------------ ------------
Interest income .............................. 29,266 879 109,725 2,828
Interest expense ............................. (141,660) (102,172) (307,053) (287,294)
------------ ------------ ------------ ------------
Net interest expense .................... (112,394) (101,293) (197,328) (284,466)
------------ ------------ ------------ ------------
Net loss ..................................... $ (1,269,141) $ (167,289) $ (2,318,321) $ (380,032)
============ ============ ============ ============
Loss per common share and common share
equivalent ................................ $ (0.18) $ (0.04) $ (0.33) $ (0.09)
============ ============ ============ ============
Loss per common share - assuming full dilution * * * *
Weighted average common and common share
equivalent shares outstanding ............. 7,051,657 4,232,036 7,007,091 4,244,155
============ ============ ============ ============
*Anti-dilutive.
</TABLE>
The accompanying notes are an integral part of these financial statements.
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POORE BROTHERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................... $(2,318,321) $ (380,032)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation .............................................. 249,707 178,741
Amortization .............................................. 131,841 136,156
Bad debt expense .......................................... 61,000 35,068
Loss on disposition of businesses ......................... 428,000
Change in operating assets and liabilities:
Accounts receivable ..................................... 31,572 (878,677)
Inventories ............................................. 187,761 (125,266)
Other assets and liabilities ............................ (88,873) (155,216)
Accounts payable and accrued liabilities ................ (748,655) 388,829
----------- -----------
Net cash used in operating activities .......................... (2,065,968) (800,397)
----------- -----------
Cash flows from investing activities:
Proceeds on disposal of property ........................... 770,559
Sale of Texas distribution business ........................ 78,414
Purchase of short term investments ......................... (1,022,439)
Purchase of equipment ...................................... (2,789,287) (425,835)
----------- -----------
Net cash used in investing activities .......................... (2,962,753) (425,835)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock ..................... 1,253,431 1,046,511
Payments on purchase of common stock ....................... (56,709)
Stock issuance costs ....................................... (157,575) (94,639)
Proceeds from issuance of long-term debt ................... 1,734,627
Payments made on long-term debt ............................ (2,069,812) (177,032)
Net decrease in restricted certificate of deposit .......... 1,250,000
Net increase in working capital line of credit ............. 351,607 487,838
----------- -----------
Net cash provided by financing activities ...................... 2,362,278 1,205,969
----------- -----------
Net increase (decrease) in cash and cash equivalents ........... (2,666,443) (20,263)
Cash and cash equivalents at beginning of period ............... 3,603,850 200,603
----------- -----------
Cash and cash equivalents at end of period ..................... $ 937,407 $ 180,340
=========== ===========
Supplemental disclosures of cash flow information:
Summary of non cash investing and financing activities:
Construction loan for new facility ...................... $ 998,746 $ 329,981
Westminster warrants .................................... 630,000
Mortgage impounds for interest, taxes and insurance ..... 35,990
Note received for sale of Texas distribution business ... 78,414
Capital lease obligation incurred - equipment acquisition 70,859 226,220
Cash paid during the nine months for interest, net of amounts
capitalized ............................................. 330,223 312,981
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
POORE BROTHERS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies:
General
Poore Brothers, Inc. (the "Company"), a Delaware corporation, was
organized in February 1995 as a holding company and on May 31, 1995
acquired substantially all of the equity of Poore Brothers Southeast, Inc.
("PB Southeast") in an exchange transaction pursuant to which 1,560,000
previously unissued shares of the Company's common stock, par value $.01
per share (the "Common Stock"), were exchanged for 150,366 issued and
outstanding shares of PB Southeast's common stock. The exchange transaction
with PB Southeast has been accounted for similar to a pooling since both
entities had common ownership and control immediately prior to the
transaction. In December 1996, the Company completed an initial public
offering of its common stock. During 1997, the Company disposed of its
Houston, Texas distribution business and closed its Tennessee manufacturing
operation. See Note 2 to the financial statements.
The Company manufactures and distributes potato chips under the Poore
Brothers(TM) brand name, as well as private label potato chips, and also
distributes a variety of other independently manufactured snack food items.
Basis of Presentation
The consolidated financial statements include the accounts of Poore
Brothers, Inc. and all of its controlled subsidiaries. In all situations,
the Company owns from 99% to 100% of the voting interests of the controlled
subsidiaries. All significant intercompany amounts and transactions have
been eliminated. The financial statements have been prepared in accordance
with the instructions for Form 10-QSB and, therefore, do not include all
the information and footnotes required by generally accepted accounting
principles. In the opinion of the Company, all adjustments required to
fairly present the Company's financial position, results of operations and
cash flows as of September 30, 1997 have been made. A description of the
Company's accounting policies and other financial information is included
in the audited December 31, 1996 financial statements filed with the Form
10-KSB for the fiscal year ended December 31, 1996. Included in this filing
are footnotes and information that is new or updated subsequent to the
filing of the Form 10-KSB. The results of operations for the quarter and
nine months ended September 30, 1997 are not necessarily indicative of the
results expected for the full year.
Certain expenses relating to manufacturing costs and promotional
expenses have been reclassified for the previously reported periods shown
as part of this current filing in order to conform to the current financial
statement classifications and to those that are preferred in the industry.
The current and previously reported amounts are shown in the table below.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1996 September 30, 1996
---------------------------- ----------------------------
Previously Current Previously Current
reported filing reported filing
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues ................................. $ 4,792,000 $ 5,019,964 $ 12,960,848 $ 13,549,778
Cost of sales ............................ 3,639,305 4,177,929 9,931,553 11,345,613
Gross profit ............................. 1,152,695 842,035 3,029,295 2,204,165
Operating expenses and restructuring costs 1,218,691 908,031 3,124,861 2,299,731
Operating (loss) ......................... (65,996) (65,996) (95,566) (95,566)
</TABLE>
Loss Per Share
Loss per common share and common share equivalent ("loss per common
share") is computed by dividing the net loss by the weighted average number
of shares of Common Stock and common stock equivalents outstanding during
each period. Pursuant to the Securities and Exchange Commission Staff
Accounting Bulletin (SAB) No. 83, Company issuance of Common Stock, and
options and warrants to purchase Common Stock granted by the Company during
the 12 months immediately preceding the initial filing date of the
Company's initial public offering have been included in the calculation of
weighted average number of shares of Common Stock outstanding as if the
underlying shares were outstanding for all periods presented (even if
anti-dilutive, using the treasury stock method and an offering price of
$3.50 per share). The effect on loss per common share for the outstanding
options and warrants issued prior to the one year period preceding the
initial public offering have been excluded from the loss per common share
computation as they are anti-dilutive. For 1996, the principles of SAB No.
83 were applied for the first nine months of the year before the initial
public offering became effective. For the first nine months of 1997, the
principles of Accounting Principles Board Opinion No. 15 were followed.
Accordingly, the effect on loss per
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<PAGE>
common share of the outstanding options and warrants in the first nine
months of 1997 have been excluded from the computation as they are
anti-dilutive. Loss per common share, assuming full dilution, is not
applicable for loss periods as it is anti-dilutive.
2. Restructuring Actions
On June 4, 1997, Poore Brothers of Texas, Inc. ("PB Texas"), a
wholly-owned subsidiary of Poore Brothers, Inc., sold it's Houston, Texas
distribution business to Mr. David Hecht (the "Buyer"), pursuant to an
Asset Purchase, Licensing and Distribution Agreement effective June 1,
1997. Under the Agreement, the Buyer was sold certain assets of PB Texas
(including inventory, vehicles and capital equipment), was granted a
license to be the Company's exclusive distributor in the Houston, Texas
market, and agreed not to distribute any other brand of kettle chips. The
"Sale of Texas distribution business" in the Statement of Operations
reflects a $150,000 one-time charge for the sale of PB Texas. This charge
included amounts related to asset write-downs ($83,000), salaries and
benefits ($57,000), and lease termination costs ($10,000) related to the
disposal of the business in June 1997.
In September 1997, the Company consolidated all of its manufacturing
operations into its new 60,000 square foot Goodyear, Arizona facility. As
part of the consolidation, the Company closed its LaVergne, Tennessee (PB
Southeast) facility on September 30, 1997 resulting in the termination of
30 employees. The Company incurred a one-time charge of approximately
$470,000 in connection with the closure of its PB Southeast manufacturing
operation. The charge included amounts related to asset write-downs
($345,000), salaries and benefits ($50,000), and lease termination
expenses ($75,000).
In connection with the Company's sale of the Texas distribution
business in June 1997 and the closure of the Tennessee manufacturing
operation in September 1997, $428,000 of the $620,000 in total charges
represents non-cash asset write-downs. Of the $192,000 which requires cash
payments, $67,000 has been paid as of September 30, 1997, an additional
$68,000 will be paid by December 31, 1997, and the remaining $57,000 will
be paid through November 1998. In connection with the closure of the
Tennessee operation and the relocation of certain assets to Arizona,
maturity of the Company's $167,000 Commercial Development Block Grant from
the State of Tennessee (the "CDBG Loan"), if accelerated, would be paid
from existing working capital.
3. Long-Term Debt
During September 1997, the Company financed an additional $114,380 of
production equipment with FINOVA Capital Corporation pursuant to a lease
line for equipment installed recently in the Company's new facility. The
total amount financed in 1997 as part of the equipment lease line with
FINOVA Capital Corporation is $833,387.
The Company's $1 million working capital line of credit automatically
renews as of November 30, 1997 for a one-year period. At September 30,
1997, the Company had over $1.0 million of eligible receivables.
At September 30, 1997, the Company had oustanding 9% Convertible
Debentures due July 1, 2002 (the "9% Convertible Debentures") in the
principal amount of $2,299,591. The Company was not in compliance with a
required interest coverage ratio of 1.5:1 (actual of -5.2:1). However, the
holders of the 9% Convertible Debentures have granted the Company a waiver
effective through September 30, 1998. After that time, the Company will be
required to be in compliance with the following financial ratios, so long
as the 9% Convertible Debentures remain outstanding: working capital of at
least $1,000,000; minimum shareholders' equity (net woth) that will be
calculated based upon the earnings of the Company and the consideration
received by the Company from issuances of securities by the Company; an
interest coverage ratio of at least 2.0:1; and a current ratio at the end
of any fiscal quarter of at least 1.1:1. Interest on the 9% Convertible
Debentures is paid by the Company on a monthly basis. Monthly principal
payments of approximately $20,000 are required to be made by the Company
beginning in July 1998 through July 2002. Management believes that the
fulfillment of the Company's plans and objectives will enable the Company
to attain a sufficient level of profitability to be in compliance with the
financial ratios or alternatively, that the Company will be able to obtain
an extension or renewal of the waivers; however, there can be no assurance
that the Company will attain any such profitability, be in compliance with
the financial ratios upon the expiration of the waivers or be able to
obtain an extension or renewal of the waivers. Any acceleration under the
9% Convertible Debentures prior to their maturity on July 1, 2002 could
have a material adverse effect upon the Company.
4. Litigation
On July 11, 1997, summary judgement was granted in favor of all
defendants, including PB Southeast, a subsidiary of the Company, on all
counts of the Gossett lawsuit. In that lawsuit, James Gossett asserted that
he was entitled to acquire up to 49% of the stock of PB Southeast pursuant
to an alleged oral agreement with Mark Howells, Poore Brothers' current
Chairman of the Board of Directors. Mr. Gossett also asserted claims based
upon an alleged breach of fiduciary duty and alleged interference with the
business of Poore Brothers Pacific, Inc., a company with which Mr. Gossett
claimed to be associated. In its July 11, 1997 Order, the Maricopa County
(Arizona) Superior Court ruled that there was no oral contract and that the
remainder of plaintiffs' claims could not support a cause of action against
the defendants. Because no final judgment has been entered by the Court,
the time for filing post-judgment motions and/or for perfecting an appeal
has not expired.
7
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5. Pro Forma Financial Statements
On June 4, 1997, PB Texas entered into an Asset Purchase, Licensing
and Distribution Agreement effective June 1, 1997, pursuant to which PB
Texas sold certain assets (including inventory, vehicles and capital
equipment) to Mr. David Hecht (the "Buyer"). In addition, pursuant to the
Agreement the Buyer has been granted a license to be the Company's
exclusive distributor in the Houston, Texas market. The purchase price for
the assets sold by PB Texas was approximately $157,000, 50% of which was
paid by the Buyer in cash at the closing and 50% of which will be paid
pursuant to a one year, non-interest bearing promissory note issued by the
Buyer to the Company. The Company provided certain financial support to the
Buyer, estimated at $40,000, in connection with the transition of the
business to the Buyer. As a result of this transaction, the PB Texas
distribution operation has been dissolved.
Pro forma information has been provided below for the following
periods - the three months ended September 30, 1997 and 1996; and the nine
months ended September 30, 1997 and 1996. The pro forma data is based on
the historical statement of operations, with elimination of all PB Texas
transactions. The revenue decrease associated with the elimination of PB
Texas was $1,323,427 for the nine months ended September 30, 1997. Costs
and expenses were reduced with the elimination of PB Texas by $1,443,286
for the nine months ended September 30, 1997. There was an additional one
time charge of $150,000 in June 1997 associated with the disposition of PB
Texas. Accordingly, the pro forma statements of operations below have been
adjusted to reflect the above mentioned amounts.
POORE BROTHERS, INC.
PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- --------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 3,334,303 $4,280,628 $11,335,475 $11,403,235
Cost of sales 3,011,936 3,484,015 9,844,011 9,262,135
----------- ---------- ----------- -----------
Gross profit 322,367 796,613 1,491,464 2,141,100
Selling, general and administrative expenses 1,009,093 831,399 2,872,577 2,040,737
Closing of Tennessee manufacturing operation 470,021 -- 470,021 --
----------- ---------- ----------- -----------
Operating income (loss) (1,156,747) (34,786) (1,851,134) 100,363
Net interest expense (112,394) (101,293) (197,328) (283,718)
----------- ---------- ----------- -----------
Net loss $(1,269,141) $ (136,079) $(2,048,462) $ (183,355)
=========== ========== =========== ===========
Loss per common share and common share
equivalent $ (0.18) $ (0.03) $ (0.29) $ (0.04)
=========== ========== =========== ===========
</TABLE>
6. New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
adopted Statement of Financial Accounting Standard No. 128 "Earnings per
Share" ("SFAS 128"), which supersedes and simplifies the standards for
computing earnings per share ("EPS") previously found in Accounting
Principles Board Opinion No. 15, Earnings per Share ("APB 15"). SFAS 128 is
effective for financial statements issued for periods ending after December
15, 1997, including interim periods; earlier application is not permitted.
The Company will provide the required EPS disclosures in its financial
statements commencing with the fiscal year ending December 31, 1997. SFAS
128 requires restatement of all prior period EPS data presented. Pursuant
to the provisions of SFAS 128, the
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<PAGE>
Company's net loss per common share was $0.18 for the 1997 third quarter,
$0.05 for the 1996 third quarter, $0.33 for the nine months ended September
30, 1997 and $0.11 for the nine months ended September 30, 1996. The
application of the provisions of SFAS 128 would have no effect on the
amounts reported for net loss per common share assuming full dilution.
In February 1997, FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." This statement establishes standards for
disclosing information about an entity's capital structure. The Company has
not yet determined the effect, if any, of SFAS No. 129 on the consolidated
financial statements.
FASB Statement No. 130 "Reporting Comprehensive Income," which the
Company will adopt during the first quarter of 1998, establishes standards
for reporting and display of comprehensive income and its components in
financial statements. Comprehensive income generally represents all changes
in shareholders' equity except those resulting from investments by or
distributions to shareholders. The Company has not yet determined the
effect, if any, of SFAS No. 130 on the consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This Statement will
change the way public companies report information about segments of their
business in their annual financial statements and requires then to report
selected segment information in their quarterly reports issued to
shareholders. It also requires entity-wide disclosures about the products
and services an entity provides, the material countries in which it holds
assets and reports revenues, and its major customers. The Statement is
effective for fiscal years beginning after December 15, 1997. The Company
has not yet determined the effect, if any, of SFAS 131 on the consolidated
financial statements.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Quarter ended September 30, 1997 compared to the quarter ended
September 30, 1996
Revenues for the three months ended September 30, 1997 were
$3,334,303, down $1,685,661 or 34%, from $5,019,964 for the three months
ended September 30, 1996. The disposition of the PB Texas distribution
operation contributed approximately $739,000 to the revenue decline,
consisting of $655,000 in sales of products manufactured by others and
$84,000 in Poore Brothers manufactured products. An additional $262,000
decrease occurred in sales of products manufactured by others due to the
elimination of several unprofitable product lines. Poore Brothers kettle
chip revenues, excluding PB Texas, for the third quarter of 1997 were
$2,321,000, down $558,000, or 19%, from $2,879,000 for the third quarter of
1996. This decrease was driven principally by lower volume as a result of
the Company's discontinuance of unprofitable promotion programs with
certain customers. Revenue from low-fat potato chips decreased $111,000 to
$110,000 (approximately 3% of revenues) due to a cessation in product
supply by the supplier of the Company's low-fat potato chips. The Company
does not know at this time when or if the supplier will resume production.
The Company does not expect the cessation to have a material impact on
future operating results.
Gross profit for the three months ended September 30, 1997, was
$322,367, or 10% of revenues, as compared to $842,035, or 17% of revenues,
for the three months ended September 30, 1996. The decrease resulted from a
combination of lower revenues (approximately $200,000), lower manufacturing
efficiencies at the Tennessee operation due to volume (approximately
$200,000), and increased costs (primarily labor, material usage, and
move-related) in connection with the transition to new production equipment
and the move into the new Goodyear manufacturing and distribution facility
(approximately $100,000).
Selling, general and administrative expenses increased to $1,009,093
for the three months ended September 30, 1997 from $908,031 for the same
period in 1996. This represented a $101,062 increase, or 11%, over the
third quarter of 1996. The increase in selling, general, and administrative
expenses was primarily the result of higher
9
<PAGE>
professional service costs (legal, accounting, insurance and printing)
associated with being a public company. In addition, a decrease in expenses
due to the disposition of the Texas distribution business was offset by
higher selling-related costs reflecting the Company's increased
distribution geography and some office-related costs in connection with the
move to the new facility.
During the third quarter of 1997, the Company incurred a one-time
charge of approximately $470,000 in connection with the closure of its PB
Southeast manufacturing operation. This charge included amounts related to
asset write-downs ($345,000), salaries and benefits ($50,000), and lease
termination expenses ($75,000).
Net interest expense increased to $112,394 for the quarter ended
September 30, 1997 from $101,293 for the quarter ended September 30, 1996.
This increase was due primarily to interest expense related to the
permanent financing on the new manufacturing facility, offset by an
increase in interest income generated from investment of the remaining
proceeds of the initial public offering.
The Company's net losses for the quarters ended September 30, 1997 and
September 30, 1996 were $1,269,141 and $167,289, respectively. The
increased net loss was attributable primarily to the lower gross profit
resulting from lower revenues and higher manufacturing costs and expenses
associated with the closing of the PB Southeast manufacturing operation.
Nine months ended September 30, 1997 compared to the nine months ended
September 30, 1996
Revenues for the nine months ended September 30, 1997 were
$12,658,902, down $890,876 or 7%, from $13,549,778 for the nine months
ended September 30, 1996. Due to the disposition of PB Texas in June 1997,
revenues declined by $824,000. Sales of Poore Brothers manufactured potato
chips grew $195,000 to $8,817,000. A decrease of $500,000 in revenues
related to the elimination of several unprofitable product lines
(manufactured by others) was offset by $238,000 in growth of several other
distributed product lines resulting in revenues from products manufactured
by others of $3,842,000.
Gross profit for the nine months ended September 30, 1997 was
$1,519,320 or 12% of revenues, as compared to $2,204,165 or 16% of revenues
for the nine months ended September 30, 1996. The decrease resulted from
approximately $218,000 of gross profit lost as a result of the disposition
of the Texas distribution business and the remainder was due to erosion of
gross profit as a percentage of revenue. One-half of the erosion occurred
in the Tennessee operation as a result of lower volume from the
discontinuance of unprofitable promotion programs. The balance was due to
higher manufacturing costs (including labor, material usage, depreciation
and move-related) associated with the Company's higher production capacity
and transition to new manufacturing equipment and a new facility.
Selling, general and administrative expenses increased to $3,020,292
for the nine months ended September 30, 1997, up $720,561 or 31%, from
$2,299,731 in 1996. Included in selling, general and administrative
expenses in 1997 were approximately $255,000 of restructuring expenses
related to severance, relocation, moving and equipment write-downs. In
addition, the Company incurred higher professional service costs ($200,000
of legal, accounting, insurance and printing) associated with being a
public company. Also, charges of $127,000 were incurred due to higher
occupancy costs and the transition into the new Arizona facility.
Additional sales related expenses of $85,000 were incurred as a result of
the expansion into new geographic markets.
The "Sale of Texas distribution business" in the Statement of
Operations reflects a $150,000 one-time charge for the sale of PB Texas.
This charge included amounts related to asset write-downs ($83,000),
salaries and benefits ($57,000), and lease termination costs ($10,000)
related to the disposal of the business in June 1997.
During the third quarter of 1997, the Company incurred a one-time
charge of approximately $470,000 in connection with the closure of its PB
Southeast manufacturing operation. This charge included amounts related to
asset write-downs ($345,000), salaries and benefits ($50,000), and lease
termination expenses ($75,000).
10
<PAGE>
Net interest expense decreased to $197,328 for the nine months ended
September 30, 1997 from $284,466 for the nine months ended September 30,
1996. The decrease was due primarily to $107,000 of increased interest
income generated from investment of the proceeds of the initial public
offering that occurred in December 1996. There was a $20,000 increase in
interest expense due principally to the permanent financing on the new
facility and additional equipment leases.
The Company's net losses for the nine months ended September 30, 1997
and September 30, 1996 were $2,318,321 and $380,032, respectively. The
increased net loss was attributable to lower gross profit due to lower
revenues and higher manufacturing costs, increases in selling, general and
administrative expenses, costs associated with the closing of the PB
Southeast manufacturing operation and the disposal of the PB Texas
distribution business.
Liquidity and Capital Resources
Net working capital was $2,023,031 at September 30, 1997, with a
current ratio of 1.8:1. At December 31, 1996, net working capital was
$4,185,602 with a current ratio of 2.2:1. The $2,162,571 decrease in
working capital was primarily attributable to the Company's use of cash for
operating activities of approximately $2,066,000 for the nine months ended
September 30, 1997.
Completion of the new manufacturing, distribution and headquarters
facility, along with the purchase and installation of equipment, required
funds of $2,789,287. These capital expenditures were funded by the
refinancing of the Company's $1 million short-term construction loan into a
permanent $2 million, 15-year mortgage financing arrangement at 9.03% with
Morgan Guaranty Trust Company of New York, financing of $833,387 from
FINOVA Capital Corporation on 5-year, 8.71% equipment leases and proceeds
of $770,559 from the sale of the Company's old Arizona facilities.
In connection with the Company's sale of the Texas distribution
business in June 1997 and the closure of the Tennessee manufacturing
operation in September 1997, $428,000 of the $620,000 in total charges
represents non-cash asset write-downs. Of the $192,000 which requires cash
payments, $67,000 has been paid as of September 30, 1997, an additional
$68,000 will be paid by December 31, 1997, and the remaining $57,000 will
be paid though November 1998. In connection with the Company's closure of
the Tennessee manufacturing operation and the relocation of certain assets
to Arizona, the CDBG Loan maturity, if accelerated, would be paid from
existing working capital. At September 30, 1997, the CDBG Loan had a
balance of approximately $167,000.
The Company's $1 million working capital line of credit automatically
renews as of November 30, 1997 for a one-year period. At September 30,
1997, the Company had over $1.0 million of eligible receivables.
In January 1997, the Company sold 337,500 shares of its Common Stock
pursuant to an over-allotment option granted to the underwriter of the
Company's initial public offering. Net proceeds from the sale were
approximately $1,000,000.
At September 30, 1997, the Company had outstanding 9% Convertible
Debentures due July 1, 2002 (the "9% Convertible Debentures") in the
principal amount of $2,299,591. The Company was not in compliance with a
required interest coverage ratio of 1.5:1 (actual of -5.2:1). However, the
holders of the 9% Convertible Debentures have granted the Company a waiver
effective through September 30, 1998. After that time, the Company will be
required to be in compliance with the following financial ratios, so long
as the 9% Convertible Debentures remain outstanding: working capital of at
least $1,000,000; minimum shareholders' equity (net worth) that will be
calculated based upon the earnings of the Company and the consideration
received by the Company from issuances of securities by the Company; an
interest coverage ratio of at least 2.0:1; and a current ratio at the end
of any fiscal quarter of at least 1.1:1. Interest on the 9% Convertible
Debentures is paid by the Company on a monthly basis. Monthly principal
payments of approximately $20,000 are required to be made by the Company
beginning in July 1998 through July 2002. Management believes that the
fulfillment of the Company's plans and objectives will enable the Company
to attain a sufficient level of profitability to be in compliance with the
financial ratios or alternatively, that the Company will be able to obtain
an extension or renewal of the waivers; however, there can be no assurance
that the Company will attain any such profitability, be in compliance with
the financial ratios upon the 11
<PAGE>
expiration of the waivers or be able to obtain an extension or renewal of
the waivers. Any acceleration under the 9% Convertible Debentures prior to
their maturity on July 1, 2002 could have a material adverse effect upon
the Company.
As a result of the expansion of the Company's operations, the Company
may incur additional operating losses in the future. Expenditures relating
to marketing and territory expansion, new product development and equipment
relocation may adversely affect cost of sales and selling, general and
administrative expenses and consequently may adversely affect operating and
net income. These types of expenditures are expensed for accounting
purposes as incurred, while revenue generated from the result of such
expansion may benefit future periods.
Management believes that the recent restructuring actions taken by the
Company, including the sale of the Texas distribution business,
consolidation of manufacturing in the new Arizona facility and the closure
of the Tennessee manufacturing operation, should result in improved
manufacturing efficiencies and lower selling, general and administrative
costs in the future. Accordingly, management believes that current working
capital, together with available line of credit borrowings, and anticipated
cash flows from operations, will be sufficient to finance the operations of
the Company for at least the next twelve months. This belief is also based
on current operating plans and certain assumptions, including those
relating to the Company's future revenue levels and expenditures, industry
and general economic conditions and other conditions. If any of these
plans, assumptions or factors change, the Company may require future debt
or equity financing to meet its business requirements. There can be no
assurance that such financing will be available or, if available, on terms
attractive to the Company.
In February 1997, the Financial Accounting Standards Board ("FASB")
adopted Statement of Financial Accounting Standard No. 128 "Earnings per
Share" ("SFAS 128"), which supersedes and simplifies the standards for
computing earnings per share ("EPS") previously found in Accounting
Principles Board Opinion No. 15, Earnings per Share ("APB 15"). SFAS 128 is
effective for financial statements issued for periods ending after December
15, 1997, including interim periods; earlier application is not permitted.
The Company will provide the required EPS disclosures in its financial
statements commencing with the fiscal year ending December 31, 1997. SFAS
128 requires restatement of all prior period EPS data presented. Pursuant
to the provisions of SFAS 128, the Company's net loss per common share was
$0.18 for the 1997 third quarter, $0.05 for the 1996 third quarter, $0.33
for the nine months ended September 30, 1997 and $0.11 for the nine months
ended September 30, 1996. The application of the provisions of SFAS 128
would have no effect on the amounts reported for net loss per common share
assuming full dilution.
FORWARD LOOKING STATEMENTS
WHEN USED IN THIS FORM 10-QSB AND IN FUTURE FILINGS BY THE COMPANY WITH
THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), THE WORDS OR PHRASES
"WILL LIKELY RESULT," "THE COMPANY EXPECTS," "WILL CONTINUE," "IS ANTICIPATED,"
"ESTIMATED," "PROJECT," OR "OUTLOOK," OR SIMILAR WORDS OR EXPRESSIONS, ARE
INTENDED TO IDENTIFY "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. THE COMPANY WISHES TO CAUTION READERS NOT TO
PLACE UNDUE RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS, EACH OF WHICH SPEAK
ONLY AS OF THE DATE MADE. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL EARNINGS AND THOSE PRESENTLY ANTICIPATED OR PROJECTED. IN LIGHT OF
SUCH RISKS AND UNCERTAINTIES, THERE CAN BE NO ASSURANCE THAT FORWARD-LOOKING
INFORMATION CONTAINED IN THIS FORM 10-QSB WILL, IN FACT, TRANSPIRE OR PROVE TO
BE ACCURATE. THE COMPANY HAS NO OBLIGATION TO PUBLICLY RELEASE THE RESULT OF ANY
REVISIONS THAT MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT
ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES OCCURRING AFTER THE DATE OF
SUCH STATEMENTS.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 11, 1997, summary judgement was granted in favor of all
defendants, including Poore Brothers Southeast, Inc., a subsidiary of Poore
Brothers, Inc, on all counts of the Gossett lawsuit. In that lawsuit, James
Gossett asserted that he was entitled to acquire up to 49% of the stock of Poore
Brothers Southeast, Inc. pursuant to an alleged oral agreement with Mark
Howells, Poore Brothers' current Chairman of the Board of Directors. Mr. Gossett
also asserted claims based upon an alleged breach of fiduciary duty and alleged
interference with the business of Poore Brothers Pacific, Inc., a company with
which Mr. Gossett claimed to be associated. In its July 11, 1997 Order, the
Maricopa County (Arizona) Superior Court ruled that there was no oral contract
and that the remainder of plaintiffs' claims could not support a cause of action
against the defendants. Because no final judgment has been entered by the Court,
the time for filing post-judgment motions and/or for perfecting an appeal has
not expired.
Item 2. Changes in Securities and Use of Proceeds
In December 1996, the Company completed an initial public offering of
its common stock, par value $.01 per share (the "Common Stock"), pursuant to
which 2,250,000 shares of Common Stock were offered and sold to the public. Of
such shares, 1,882,652 shares were sold by the Company at an aggregate offering
price of $6,589,282 and 367,348 shares were sold by the holders of the 9%
Convertible Debentures (as defined below) at an aggregate offering price of
$1,285,718. The initial public offering was underwritten by Paradise Valley
Securities, Inc. (the "Underwriter"). The net proceeds to the Company from the
sale of the 1,882,652 shares of Common Stock, after deducting underwriting
discounts and commissions ($659,000), the expense of the Underwriter paid by the
Company ($198,000) and the other expenses of the offering paid by the Company
(approximately $432,000), were approximately $5,300,000. On January 6, 1997, an
additional 337,500 shares of Common Stock were sold by the Company at an
aggregate offering price of $1,181,250 upon the exercise by the Underwriter of
an over-allotment option granted to it in connection with the initial public
offering. After deducting applicable underwriting discounts and commissions
($118,000), the expense of the Underwriter paid by the Company ($35,000) and the
other expenses paid by the Company (approximately $9,000), the Company received
net proceeds of approximately $1,019,000 from the sale of such additional
shares. As of September 30, 1997, $6,319,000 of the aggregate net proceeds from
the offering had been utilized by the Company for the following purposes:
construction of plant ($2,683,000), purchase and installation of machinery and
equipment ($2,072,000), purchase of real estate ($19,000), working capital
($545,000) and purchase of short-term investments ($1,000,000).
The Registration Statement on Form SB-2 (File No. 333-5594-LA) filed by
the Company with the Securities and Exchange Commission (the "Commission") in
connection with the initial public offering was declared effective by the
Commission on December 6, 1997.
Item 3. Defaults Upon Senior Securities
At September 30, 1997, the Company had outstanding 9% Convertible
Debentures due July 1, 2002 (the "9% Convertible Debentures") in the principal
amount of $2,299,591. The Company was not in compliance with a required interest
coverage ratio of 1.5:1 (actual of -5.2:1). However, the holders of the 9%
Convertible Debentures have granted the Company a waiver effective through
September 30, 1998. After that time, the Company will be required to be in
compliance with the following financial ratios, so long as the 9% Convertible
Debentures remain outstanding: working capital of at least $1,000,000; minimum
shareholders' equity (net worth) that will be calculated based upon the earnings
of the Company and the consideration received by the Company from issuances of
securities by the Company; an interest coverage ratio of at least 2.0:1; and a
current ratio at the end of any fiscal quarter of at least 1.1:1. Interest on
the 9% Convertible Debentures is paid by the Company on a monthly basis. Monthly
principal payments of approximately $20,000 are required to be made by the
Company beginning in July 1998 through July 2002. Management believes that the
fulfillment of the Company's plans and objectives will enable the Company to
attain a sufficient level of profitability to be in compliance with the
financial ratios or alternatively, that the Company will be able to obtain an
extension or renewal of the waivers; however, there can be no assurance that the
Company will attain any such profitability, be in compliance with the financial
ratios upon the expiration of the waivers or be able to obtain an extension or
renewal of the waivers. Any acceleration under the 9% Convertible Debentures
prior to their maturity on July 1, 2002 could have a material adverse effect
upon the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description
11.1 Statement regarding computation of per share earnings.*
27.1 Financial Data Schedule.*
* Filed herewith.
(b) Current Reports on Form 8-K:
(1) Amendment No. 1 to Current Report on Form 8-K, reporting the
consummation on June 4, 1997, of the sale by Poore Brothers of Texas,
Inc. of its Houston, Texas distribution business (filed with the
Commission on August 18, 1997).
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
POORE BROTHERS, INC.
By /s/ Eric J. Kufel
Dated: November 14, 1997 ------------------------------------------------
Eric J. Kufel
President and Chief Executive Officer
(principal executive officer)
By: /s/ Thomas W. Freeze
Dated: November 14, 1997 -----------------------------------------------
Thomas W. Freeze
Vice President, Chief Financial Officer,
Treasurer and Secretary
(principal financial and accounting officer)
15
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
11.1 Statement regarding computation of per share earnings.
27.1 Financial Data Schedule.
16
EXHIBIT 11-1
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
POORE BROTHERS, INC.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss ........................................... $(1,269,141) $ (167,289) $(2,318,321) $ (380,032)
----------- ----------- ----------- -----------
Weighted average common shares outstanding ......... 7,051,657 3,473,624 7,007,091 3,485,743
Common stock equivalents from stock options and
warrants ........................................... * 758,412(1) * 758,412(1)
----------- ----------- ----------- -----------
Total weighted average common shares outstanding ... 7,051,657 4,232,036 7,007,091 4,244,155
----------- ----------- ----------- -----------
Loss per common share and common share equivalent .. $ (0.18) $ (0.04) $ (0.33) $ (0.09)
----------- ----------- ----------- -----------
(1) Anti-dilutive common stock equivalents included in accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 83.
</TABLE>
* Not included as they are anti-dilutive.
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL
STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997, INCLUDED WITH FORM 10-QSB, AND IS QUALIFIED
IN ITS ENTIRETY BY REFRERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 937,407
<SECURITIES> 1,022,439
<RECEIVABLES> 1,995,492
<ALLOWANCES> 176,000
<INVENTORY> 518,720
<CURRENT-ASSETS> 4,545,844
<PP&E> 7,568,478
<DEPRECIATION> 976,328
<TOTAL-ASSETS> 13,587,960
<CURRENT-LIABILITIES> 2,522,813
<BONDS> 4,946,020
0
0
<COMMON> 70,516
<OTHER-SE> 6,048,611
<TOTAL-LIABILITY-AND-EQUITY> 13,587,960
<SALES> 12,658,902
<TOTAL-REVENUES> 12,658,902
<CGS> 11,139,582
<TOTAL-COSTS> 11,139,582
<OTHER-EXPENSES> 3,640,313
<LOSS-PROVISION> 61,000
<INTEREST-EXPENSE> 197,328
<INCOME-PRETAX> (2,318,321)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,318,321)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,318,321)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> 0
</TABLE>
